As widely anticipated, Scott Morrison’s second budget included a number of specific measures to address housing affordability but resisted structural changes to the taxation system.
Much less anticipated was a new tax (or rather a levy) imposed on the big five Australian banks. Last night’s budget followed a recent trend we’ve seen in announcing a number of measures designed to protect the revenue base. There was a particular focus in this regard on foreign residents. The measures are also designed to encourage investment in particular sectors of the Australian economy. A number of taxation issues that were to be addressed – such as a Petroleum Rent Resource Tax and the use of stapled structures to re-characterise trading income – have been deferred.
So where do we see the biggest impacts on business and investment?
The Government held its position of resisting changes to negative gearing. Instead, it has continued its focus on affordability by introducing ‘supply-side’ measures. This drive will be aided by some concessional tax provisions to assist first-home purchasers. These measures are a mixture of old and new: funding arrangements to accelerate new development opportunities will combine with changes to tax concessions to encourage housing investment.
1. Changes to managed investment trust (MIT) and CGT rules in relation to affordable housing
For income years starting on or after 1 July 2017, the MIT regime will be amended to allow for the acquisition, construction or redevelopment of property for affordable housing. Residential property will be considered affordable housing if leased at below-market rent to low-to-moderate income earners. As the Australian Taxation Office generally takes the view that investment in residential housing is an active, rather than a passive investment (on the basis the investment has a primary purpose of deriving capital gains) such activities are not usually eligible for the concessional MIT rate and are usually taxed at 30 per cent. Under the new rules, investors will be taxed in a manner broadly consistent with the existing MIT rule, subject to some minor variations:
Non-resident investors from countries with which Australia has a recognised exchange of information arrangement, will generally be subject to a concessional 15 per cent final withholding tax rate on investment returns, including income from capital gains. However, a tax rate of 30 per cent rate will apply to capital gains from the disposal of property held for less than 10 years and to MIT income in a given income year where less than 80% of all income is from affordable housing; and
Resident investors in affordable housing MITs will continue to be taxed on investment returns at their marginal tax rates. However, income from capital gains will be eligible for an increased CGT discount of 60 per cent for individuals where the property sold is managed by a registered community housing provider (RCHP) and has been held by the MIT for at least three years.
Consistent with the measures above, Australian resident individuals who invest directly in affordable housing managed by an RCHP on or after 1 January 2018 will be eligible for a 60 per cent CGT discount on capital gains from affordable housing held for at least three years.
2. National Housing Infrastructure Fund (NHIFC) and related funding
The Government will provide an initial $9.6 million in 2017-18 to establish the NHFIC, which will commence operations from 1 July 2018. The NHFIC will also administer the National Housing Infrastructure Fund, a five-year $1 billion facility that will provide local governments with concessional loans, grants and equity to finance critical infrastructure required to deliver more housing supply sooner.
Separate to the NHIFC, the Government will incentivise local and state government in NSW to accelerate housing supply in Western Sydney.
3. First home owner savings scheme
From 1 July 2017, individuals can make voluntary contributions of up to $15,000 per year and $30,000 in total, to their superannuation account to purchase a first home. These contributions, which are taxed at 15 per cent along with deemed earnings, can be withdrawn for a deposit. Withdrawals will be taxed at marginal tax rates less a 30 per cent offset and allowed from 1 July 2018.
While the measures are designed to help individuals save for a home, it may also have the unintended consequences of encouraging younger taxpayers to be more engaged with their superannuation fund. Hopefully we’ll see focus on the investment return and fees charged, instead of the usual approach of ignoring superannuation because the benefits are many decades away.
Also the change to superannuation to allow access to funds to buy housing will see changes to the sole purpose test and preservation rules in the Superannuation Law. Close attention should be paid to how these changes are implemented.
4. Superannuation concession for downsizers
From 1 July 2018, people aged 65 and over will be able to make a non-concessional (post-tax) contribution into their superannuation of up to $300,000 from the proceeds of selling their home. This measure will apply to a principal place of residence held for a minimum of 10 years. Both members of a couple will be able to take advantage of this measure for the same home, meaning $600,000 per couple can be contributed to superannuation through the downsizing cap. These new contributions will be in addition to any other voluntary contributions that people are able to make under the existing contribution rules and concessional and non-concessional caps.
5. Foreign investment regime changes
The Budget includes measures that appear to be intent on increasing the supply of new residential housing available to Australian residents by:
placing a 50 per cent cap on foreign ownership in new developments (applied through conditions imposed on New Dwelling Exemption Certificates); and
charging foreign resident owners of residential properties an annual charge if the property is not occupied or available to rent for at least six months each year.
The latter change has the benefit of either deriving revenue from the annual charge or revenue from income tax on forced rental of Australian investment properties. A win-win for the revenue.
An unanticipated feature of the budget was the announcement of a new bank tax (called a levy) on authorised deposit-taking institutions with licensed entity liabilities of at least $100 billion from 1 July 2017. The levy will be an annualised rate of 0.06 per cent (or 6 basis points) of licensed entity liabilities and is expected to raise at least $1.6 billion per year. The details of how the levy will operate (for example, whether it will be deductible or whether it will generate franking credits for the affected banks) are not yet known.
The Government also announced measures to close down hybrid tax abuse by multinational banks and insurance companies by ensuring they cannot exploit tax advantages arising through the issue of regulatory capital under schemes involving foreign branches.
Taxation of foreign residents in relation to Australian housing
The budget includes a number of measures that are specifically targeted at foreign residents that invest in Australian real property. The measures include:
removing the CGT main residence exemption for non-residents that own Australian real estate;
increasing the foreign resident withholding tax rate from 10 per cent to 12.5 per cent and lowering the threshold of transaction value to which withholding potential applies from $2 million to $750,000; and
amending CGT rules to allow interests of foreign residents in Australian real property that is indirectly held to be aggregated with interest held by associates for the purpose of determining liability to CGT.
Tax integrity measures
The Budget includes specific integrity measures addressing areas of particular concern. They include:
amending the multinational anti-avoidance law (MAAL) to ensure that partnerships with minority Australian partners are nonetheless foreign entities and thereby subject to the measure. The MAAL was introduced from 1 January 2016 to close down schemes involving foreign residents that avoided Australian income tax by ensuring that goods and services were not supplied through a permanent establishment in Australia. The amendment will be enacted with retrospective effect, applying from 1 January 2016.
amending the GST law such that purchasers of newly constructed residential dwellings are required to remit the GST component of the purchase price directly to the ATO. It is understood the measure is intended to address potential non-compliance by developer entities with GST on housing sales. While details are yet to be released, it is possible that the administration may be intended to be administered in a similar manner to foreign resident capital gains withholding tax.
measures to prevent abuse of the tax system in relation to precious metals and small business concessions; and
superannuation measures in relation to non-arm’s length income and expenses and limited recourse borrowing in relation to transfer amounts.
The Government has also announced its intention to disallow deductions for travel for real estate investors and limit depreciation deductions for investors to amounts actually incurred.
Personal tax and small business measures
From 1 July 2019, the Medicare surcharge will increase from 2 to 2.5%, accompanied by various low-income threshholds for the Medicare levy being increased. Small business depreciation concessions introduced in the 2015-16 budget will be extended to 30 June 2018.
Continuing its innovation agenda, the Government has also announced that it will introduce measures to assist Australia’s financial innovation sector by:
reducing barriers for new banks entering the Australian market;
removing the double taxation of digital currency under the GST rules
extending crowd-sourced equity funding to eligible proprietary companies and thereby extending a new source of funding for small businesses
making it easier for startups and innovative small businesses to raise capital
introducing a world-leading legislative financial services regulatory sandbox to enable new and innovative FinTech products and services to be tested in Australia.
Of particular interest is the new crowd-sourced equity funding rules and the regulatory sandbox.
Crowd-sourced funding (CSF) is an emerging form of funding that allows entrepreneurs to raise funds from a large number of investors. Legislation to create a CSF framework for public companies will commence on 29 September 2017. The proposal is to extend the new rules to proprietary companies with additional obligations. The obligations for CSF proprietary companies include: a minimum of two directors; financial reporting in accordance with accounting standards, audit requirements, restrictions on related party transactions and minimum shareholder rights to participate in exit events.
The regulatory sandbox allows more businesses to test a wider range of new financial products and services without a licence. These services might include providing financial advice, issuing consumer credit, offering short term deposit or payment products. The testing timeframe of 24 months allows businesses to evaluate the commercial viability of new concepts and promoting competition.
There are significant opportunities for the community housing sector. The extension of the new tax concessions to Managed Investment Trusts will see new activity in the property funds sector and managed funds more generally. The infrastructure announcements will see the establishment of new non-government public companies and new infrastructure projects. The start-up space will see changes to the fundraising rules to simplify capital raising.